01—Abstract
Summary
Summary of the 10-K filed November 20, 2006. Cited figures are marked; the original filing is the authoritative source.
Analog Devices (ADI) closed fiscal 2006 (ended October 28, 2006) with net sales of $2,573.2 milliona, up 8% from $2,388.8 million in fiscal 2005, and diluted EPS of $1.48, up from $1.08.
Gross margin improved to 58.5% from 57.9%, and net income rose to $549.5 millionb from $414.8 million. Growth was led by the industrial end market (up 15% to 42% of revenue) and consumer (up 16%), while computer (down 10%) and wireless chipset sales (down 10%) weakened. Results were helped by a $35.2 million IRS-examination tax benefit and a lower effective tax rate of 17.2%, and were partly offset by $73.9 million of stock-based compensation expense from the adoption of SFAS 123R and $21.7 million of purchased in-process R&D from three acquisitions.
Balance sheet and cash flow remain strong. ADI ended the year with $2,128 millionc in cash, cash equivalents and short-term investments and no debt. Operating cash flow was $621.1 million, and the company returned substantial capital: it repurchased about 30.7 million shares for roughly $1,025 million and paid $201.5 million in dividends.
Management guided first-quarter fiscal 2007 total revenue to $670d–$705 million, including a one-time $35 million intellectual property license payment, with diluted EPS of $0.36–$0.42. Investors should also note the ongoing option-granting investigations. ADI agreed to a tentative SEC settlement with a $3 million civil penalty from the company and a $1 million penalty from CEO Jerald Fishman, with some repricing of options.
The company says no restatement is needed, estimating a cumulative net income impact of $21.8 million over fiscal 1998–2005. Several related shareholder and class action suits are pending, though one derivative suit was dismissed.
Management considers none of the matters likely to have a material adverse effect on financial position. The company also closed its Sunnyvale wafer fab in November 2006, with about $50 million in expected annual savings beginning in fiscal 2007.
02—Key points
Key Highlights
- Fiscal 2006 net sales rose 8% to $2.573 billion, with industrial revenue up 15% to 42% of total sales and consumer up 16%.
- Gross margin expanded to 58.5% from 57.9%, supported by higher wafer fab utilization and a richer product mix.
- Net income grew 32% to $549.5 million (diluted EPS $1.48 vs. $1.08), helped by a 17.2% effective tax rate that included a $35.2 million IRS-related benefit.
- Stock-based compensation under SFAS 123R reduced fiscal 2006 net income by $52.6 million, and $21.7 million of in-process R&D was expensed on acquisitions.
- Cash, equivalents and short-term investments were $2.13 billion with no debt; operating cash flow was $621 million.
- ADI repurchased about $1.025 billion of stock (30.7 million shares) and paid $201.5 million in dividends, leaving $312 million of buyback authorization.
- Q1 fiscal 2007 guidance: total revenue of $670–$705 million (including a one-time $35 million IP license payment) and diluted EPS of $0.36–$0.42.
03—Questions
Frequently Asked Questions
How did Analog Devices perform financially in fiscal 2006?
Net sales grew 8% to $2,573 million and net income rose to $549.5 million, or $1.48 per diluted share, compared with $1.08 in fiscal 2005. Gross margin improved to 58.5%, though operating margin was flat at about 21%, as stock-based compensation, acquisition charges and special charges increased operating expenses.
Which end markets drove growth and which declined?
Industrial sales rose 15% and consumer sales rose 16%, driven by factory automation, medical and test equipment, and digital home products. Computer sales fell 10% due to power management portfolio changes and weaker PC audio codec demand, and wireless chipset sales fell 10%. Communications grew 2%, supported by basestation products, which offset the loss of the DSL product line sold in February 2006.
What is the status of the stock option investigations?
ADI reached a tentative settlement with the SEC. The company would pay a $3 million civil penalty and consent to a cease-and-desist order, and CEO Jerald Fishman would pay a $1 million penalty. Options granted to Fishman and certain directors would be repriced, and the company says no restatement is needed. Separate shareholder, derivative and ERISA class action matters remain, and management does not expect them to have a material adverse effect.
What are the main risks to ADI's outlook?
The filing highlights semiconductor cyclicality, pricing pressure from competitors such as Texas Instruments and Linear Technology, and dependence on sole-source foundry TSMC, which supplied about $281 million of product in fiscal 2006. Other risks include exposure to international markets (about 75% of revenue), currency movements, IP litigation (including the Biax and Bender patent suits), and key personnel retention.
What capital allocation and cash actions did the company take?
ADI spent about $1.025 billion on share repurchases, paid $201.5 million in dividends ($0.56 per share for the year), and invested $129.3 million in capital expenditures. It also spent $157 million on acquisitions (Integrant, AudioAsics and TTPCom assets). The board raised the quarterly dividend to $0.16 and expects capital spending of about $175 million in fiscal 2007.
04—Continue